Warren Buffett is one of the greatest investors of all time. Over the past 70 years, he’s grown an initial investment of $100,000 into a company with more than $700bn of assets.
I think anyone can learn a lot by looking at the famous investor’s career. I’ve certainly learnt a lot. Indeed, if I had to invest a lump sum of £1,000 today, I’d follow his advice.
Warren Buffett’s advice
Buffett believes investors should only buy high-quality businesses. These are companies with substantial competitive advantages, which can be anything from significant economies of scale to global brands.
Two of his favourite companies are Apple and Coca-Cola. Both of these organisations have incredible brands, which are recognised the world over. That’s helped them grow year after year and generate enormous profits for their investors.
He focuses on these high-quality companies and ignores low-quality businesses, no matter how cheap they might be. Indeed, he once said: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.“
If I had to invest a lump sum of £1,000 today, I’d follow this advice. However, rather than picking winners on valuation alone, I’d seek out the market’s best businesses and focus on profit margins, competitive advantages and brand strength.
Buffett also places a lot of emphasis on the strength of a company’s management. He’s looking for highly competent managers that can run a business through thick and thin, as well as coping with everything the world throws at them.
And he also tends to avoid commodity companies such as oil and mining corporations. The reason why he tends to stay away from the sectors is simple. Commodity prices can be highly volatile. As such, these companies have to hope for the best that prices remain high and above production costs. That involves a great deal of guesswork, which even Buffett may struggle with.
An investment framework
Using all of the above, I’ve been able to put together an investment framework built on his advice. This framework is relatively simple. It suggests I should only target stocks with strong managers, wide profit margins, a robust competitive advantage, and avoid resource companies.
With this framework in mind, I’d invest my £1,000 in companies like Unilever and Reckitt. Both of these enterprises own portfolios of billion-dollar brands. That’s their competitive advantage. Highly experienced management teams also run them and, most importantly, they can set their own prices.
Of course, this strategy might not be suitable for all investors. Finding good companies can be incredibly challenging. Even Buffett gets it wrong occasionally. That’s why he’s also advocated using a low-cost passive index tracker fund for investors who might not have the time or experience to find individual businesses. This strategy might be more suitable for less experienced investors.
However, if I had an investment of £1,000 today, I would follow Buffett’s advice and buy Unilever and Reckitt.
